FHP Tectonics Corporation v. American Home Assurance Company
57 N.E.3d 575
Ill. App. Ct.2016Background
- FHP contracted with the Illinois State Toll Highway Authority and subcontracted work to NES; the subcontract required NES to add FHP as an additional insured on its commercial general liability policy.
- NES’s policy was issued by American Home Assurance Company (American) for Oct. 1, 2006–Oct. 1, 2007 and included: (1) Coverage A for bodily injury/property damage; (2) a Self-Insured Retention (SIR) endorsement stating American has "the right but not the duty to defend" and that the named insured (NES) is responsible for certain defense costs; and (3) an Additional Insured–Primary Insurance (AI-PI) endorsement modifying the Other Insurance clause to make coverage for additional insureds primary where contractually required.
- A fatal auto accident suit was filed against FHP (underlying action). FHP tendered defense to American; American denied coverage in January 2009, citing that the loss did not arise out of NES’s activities and that the policy was subject to a $500,000 retention.
- FHP sued for declaratory relief, alleging American owed a duty to defend/indemnify FHP as an additional insured, that American was estopped from denying coverage, and that FHP was entitled to counsel of its choice. American moved to dismiss, arguing the SIR endorsement removed any duty to defend. The trial court dismissed FHP’s duty-to-defend claims with prejudice and later denied FHP leave to amend after reconsideration.
- On appeal FHP argued the court abused its discretion by denying leave to amend and that American should be estopped (including under the "mend the hold" doctrine). The appellate court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether court erred by dismissing duty-to-defend claims with prejudice and denying leave to amend | FHP: could plead ambiguity between SIR and AI-PI endorsements showing a duty to defend; amendment would cure defects | American: dismissal with prejudice was proper; FHP sought amendment only after final judgment and offered no facts to cure defects | Affirmed: denial of leave was not an abuse of discretion because FHP sought to amend after final judgment and failed to propose facts that would establish a duty to defend |
| Whether policy language is ambiguous such that American had a duty to defend FHP (additional insured) | FHP: SIR conflicts with AI-PI (SIR says right-not-duty; AI-PI treats coverage as primary), creating ambiguity and a duty to defend | American: SIR unambiguously reserves the right but not the duty to defend; AI-PI only modifies Other Insurance clause and does not itself create a duty to defend | Held: policy unambiguous — SIR removes duty to defend and AI-PI (an other-insurance modifier) does not convert that into an affirmative duty to defend |
| Whether estoppel or the "mend the hold" doctrine prevents American from asserting lack of duty to defend | FHP: American’s failure to defend under reservation of rights or to file a declaratory action estops it from later asserting the right-not-duty defense; mend the hold bars changing denial rationales | American: estoppel inapplicable where no duty to defend; it raised the right-not-duty argument in its dismissal motion; no prejudice or unfair surprise to FHP | Held: estoppel does not apply because there was no duty to defend; mend the hold inapplicable absent unfair surprise or prejudice — FHP had notice of denial and no detrimental reliance shown |
Key Cases Cited
- Employers Insurance of Wausau v. Ehlco Liquidating Trust, 186 Ill. 2d 127 (1999) (insurer that denies coverage must sue for a declaration or defend under reservation of rights; failure may lead to estoppel)
- Crum & Forster Managers Corp. v. Resolution Trust Corp., 156 Ill. 2d 384 (1993) (insurance-policy construction: courts enforce parties’ intent as expressed in the policy and construe unambiguous terms as written)
- Zurich Insurance Co. v. Raymark Industries, Inc., 118 Ill. 2d 23 (1987) (insurer’s duty to defend arises from the contract language undertaking to defend)
- John Burns Construction Co. v. Indiana Insurance Co., 189 Ill. 2d 570 (2000) (an other-insurance clause allocates coverage only after a preliminary determination that coverage is triggered)
- Royal Insurance Co. v. Process Design Associates, Inc., 221 Ill. App. 3d 966 (1991) (primary insurance liability attaches immediately upon occurrence; contrasts primary and excess coverage)
- Home Indemnity Co. v. General Accident Insurance Co. of America, 213 Ill. App. 3d 319 (1991) (primary insurer has primary duty to defend/pay defense costs once duty is triggered)